The Free Press, Mankato, MN


May 18, 2014

Time to remake shareholder capitalism

Sometimes a throwaway sentence, a passage not intended to make a major point, ends up telling a great deal more than the author intended. One such passage popped up in a recent Wall Street Journal story that documented U.S. corporations’ scramble to buy overseas companies and thereby shift their legal residency abroad to benefit from lower tax rates.

It noted that roughly 1,700 U.S.-based companies currently are holding $1.5 trillion offshore rather than bringing it home and paying taxes on it. “But that,” the story said, “has left the bulk of their funds for paying dividends or buying back shares effectively out of reach.”

Actually, those funds locked away abroad could be put to more uses than buying back shares or paying dividends if those companies brought them home. They might fund more research and development, or start a new product line, or even give employees a raise.

But the Journal story has it right. American big business these days is in the business of rewarding shareholders (a group that very much includes chief executives), to the exclusion of any other activity that might help companies flourish. They’re in the business of raising their dividends and buying back stock, practices that effectively raise the value of outstanding shares but do nothing to enhance a company’s long-term value.

But long-term value is a diminishing factor in many CEOs’ calculations, as they come under pressure from extortion artists — the euphemism is “activist investors” — who demand bigger dividends, and as the CEOs’ own fortunes are linked to share value as well.

As The Washington Post’s Steven Pearlstein recently noted, 80 percent of the companies listed on the S&P 500 bought back shares last year, spending $477 billion on raising share values by diminishing the number of shares outstanding.

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